AMERISAFE - Q4 2023
February 22, 2024
Transcript
Operator (participant)
Good day, and welcome to the AMERISAFE 2023 fourth quarter earnings conference call. Today's conference is being recorded. At this time, I'd like to turn the presentation over to Ms. Kathryn Shirley, Chief Administrative Officer. Please go ahead, ma'am.
Kathryn Shirley (Chief Administrative Officer)
Good morning. Welcome to the AMERISAFE 2023 fourth quarter investor call. If you have not received the earnings release, it is available on our website at amerisafe.com. This call is being recorded. A replay of today's call will be available. Details on how to access the replay are in the earnings release. During this call, we will be making forward-looking statements. These statements are based on current expectations and assumptions that are subject to various risks and uncertainties. Actual results may differ materially from the results expressed or implied in these segments if the underlying assumptions prove to be incorrect or as a result of risks, uncertainties, and other factors, including factors discussed in the earnings release, in the comments made during today's call, and in the Risk Factors section of our Form 10-K, Form 10-Qs, and other reports and filings with the Securities and Exchange Commission.
We do not undertake any duty to update any forward-looking statement. I will now turn the call over to Janelle Frost, AMERISAFE's President and CEO.
Janelle Frost (President and CEO)
Thank you, Kathryn, and good morning, everyone. We are pleased to report solid operating earnings results for both the fourth quarter and full year of 2023. For the year, we reported a combined ratio of 85.9%, gross premium written growth of 3.3%, and operating ROE of 17.7%. These results come during a period in the workers' compensation industry of multiyear rate decreases, somewhat offset by recent wage inflation. Competition has not lessened, as workers' compensation is one of the more profitable of the property and casualty lines. Remaining true to our disciplined approach of underwriting high hazard risk while being responsive to our agents and caring for the needs of injured workers and their employers, is evident in our consistent results year after year and serves all of our stakeholders.
Gross written premiums for the quarter were $60.3 million, increasing 8.4%. During the quarter, premiums for policies written in the quarter increased 4.7%, which was further improved by payroll audit and related premium adjustments of $4.8 million. At AMERISAFE, we continue to see strong retention in policies for which we offer renewal, with 93.9% retention in the fourth quarter. For the full year, our accident year loss ratio was in line with the prior year at 71%. The company experienced $41.1 million of favorable development on prior accident years in 2023, which we attribute to lower claims severities and proactive claims handling. In addition, we ended the year with nine severe claims, of those with case incurred in excess of a million dollar.
As of December 31, 2023, our open claim count was down 6.4% from 2022. This metric demonstrates the success of our focus on resolving and closing claims and the decline in reported claims. Our balance sheet is conservatively positioned with roughly $897 million in investments in cash, a solid reserve position, and no outstanding debt. Despite challenging market conditions, our tenure insuring high hazard risk positions the company for continued solid results. AMERISAFE's strong retention, coupled with our focus on profitable growth, is delivering robust returns to our shareholders. Finally, as it relates to capital management, AMERISAFE's board of directors has approved 8.8% increase in our regular dividend to $0.37. With that, I'll turn the call over to Andy to discuss the financials.
Andy Omiridis (EVP and CFO)
Thank you, Janelle, and good morning to everyone. For the fourth quarter of 2023, AMERISAFE reported net income of $19.2 million, or $1 per diluted share, and operating net income of $14.3 million, or $0.74 per diluted share. During the fourth quarter of 2022, net income was $20.8 million, or $1.08 per diluted share, and operating net income of $16.1 million, or $0.84 per diluted share. The lower net income was primarily driven by certain items in the quarter, driving the expense ratio higher, as well as less tax-exempt interest income, driving a higher tax rate compared with the fourth quarter of 2022.
For the full year, net income was $62.1 million, and net operating income was $55.9 million, compared with $55.6 million and $59.3 million in the prior year, respectively. Our total underwriting and other expenses were $19 million in the quarter, a 9% increase compared with the $17.4 million recognized in the prior year quarter. This increase resulted in an expense ratio of 28.9%, compared with 26.4% in the fourth quarter of 2022. The increase was primarily due to wage inflation and an increase in insurance-related assessments. For the full year, the expense ratio was 29.3%, compared with 26.5% in 2022.
For the year, our tax rate was 19.7%, compared to 17.8% in the prior year, largely due to a lower proportion of tax-exempt income versus underwriting income in the quarter compared with the last year. Turning to our investment portfolio. In the fourth quarter, net investment income increased 5.7% to $8.1 million from $7.6 million in the prior year quarter. For the full year, net investment income was $31.3 million, compared with $27.2 million in 2022. The increase was driven by the yield on new investments, which exceeded that of portfolio roll-off by approximately 200 basis points and drove the portfolio tax-equivalent book yield to 3.69% or 31 basis points higher than the previous year.
Realized gains for the portfolio and securities sold were $1.1 million in the quarter, compared with $1 million during the fourth quarter of 2022. The investment portfolio is high quality, carrying an average AA- credit rating with a duration of 4.2 years. The composition of the portfolio is 61% in municipal bonds, 25% in corporate bonds, 4% in U.S. Treasuries and agencies, 6% in equity securities, and 4% in cash and other investments. Approximately 60% of our bond portfolio is comprised of held-to-maturity securities. During the fourth quarter, interest rates moved noticeably lower, which improved the net unrealized loss position of held-to-maturity securities to $10.5 million from $35.1 million in the third quarter.
As a reminder, these held-to-maturity securities are carried at amortized cost, and therefore unrealized gains or losses on these securities are not reflected in our book value. Our capital position is strong, with a high-quality balance sheet. For the year, the company returned $93.3 million to shareholders through a combination of regular and special dividends, plus an additional $2.2 million of shares were repurchased. Finally, just a couple of other topics. Book value per share was $15.28 after paying the special dividend in December 2023, a decrease of 7.8% from year-end 2022. An operating return on average equity was 17.4% for the quarter and 17.7% for the full year.
Our statutory surplus was $254.9 million at year-end, up from $252.5 million at the prior year-end. And finally, tomorrow, February 23rd, 2024, we will be filing our 10-K with the SEC after market close. With that, I would like to open the call for the question and answer portion of the call. Operator?
Operator (participant)
Yes, sir. Thank you. And if you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, that is star one if you would like to ask a question, and we'll pause for just a moment. And once again, that is star one if you would like to ask a question. We'll take our first question from Matt Carletti with JMP Securities.
Matt Carletti (Managing Director)
Hey, good morning.
Janelle Frost (President and CEO)
Good morning, Matt.
Matt Carletti (Managing Director)
Maybe if I could start with the top line, specifically the voluntary premiums, you know, showed some modest growth, and I think you commented that policies in force also grew. And so the question is just, can you give us a little bit of color on, are there certain geographies or kind of underlying sectors of the economy exposures that you have that you're seeing certain success with, or is it more just broad-based?
Janelle Frost (President and CEO)
I'll start with your question about geographies. I'll steer away a little bit from that, and I don't think I'm not directly answering your question, but for competitive reasons, I want to be careful about speaking about geographies that I feel like we're being more successful in at the moment.
Matt Carletti (Managing Director)
Fair enough.
Janelle Frost (President and CEO)
But I will say I think it's more broad-based, to be honest, Matt. You know, we've talked a lot over the last few quarters about our internal focus on ease of doing business with our agents. You know, we've had really strong retention for a number of years, which we are very appreciative of and I think really speak to the service level of the AMERISAFE employees. At the same time, you know, agents are trying to, you know, shop new business, which does come at fewer and fewer opportunities during this market where everyone's getting a rate decrease.
We really have been focusing on ease of doing business with our agents, streamlining processes, making sure we have the right workflows, and just focusing on those agent relationships so that when the opportunities do present themselves from a new business perspective, we are at the ready. I do think just a combination of those things happening over a period of time, we've been successful in growing some new business, along with our strong retention. You were spot on about the policy count. We're very excited that we were able to grow policy count in 2023.
Matt Carletti (Managing Director)
Great. And then if I shift to, you know, thinking about where kind of margins are on the business, and as we look forward, I mean, you mentioned frequency was down. I think I caught about a 6% number. You know, we know there's pressure on pricing, but we know there's wage inflation, and that's good for margins. I guess you'd throw severity in there, too. I guess I'm asking you to look in your crystal ball a little bit and kind of how do you feel about sustainability of accident year margins when you kind of put all those pieces of the puzzle together and any other ones that I'm forgetting?
Janelle Frost (President and CEO)
No, those. You hit all the right elements. Certainly we have the realities of multiple years of rate decreases. You know, and I think if we look at 2024, nothing on a macro basis that seems to be changing that directionally. I still think it's gonna be, you know, higher single digit rate decreases going into 2024. I like how AMERISAFE is positioned because we are very disciplined in our approach, in our underwriting approach, and that we individually underwrite every single account. That margin is built into how we are underwriting those accounts today and in our pricing.
For those accounts. So I feel really good about that. From the loss perspective, you're absolutely right. Frequency is down, frequency is down for the industry, frequency is down for AMERISAFE, which we are appreciative of. But I, you know, keep in mind, the things that we write are more severity-driven than frequency-driven. So severity has been relatively modest within our expectations. There's certainly a concern in the industry, across the industry. Every article you pick up talks about medical inflation and concerns about medical inflation. But to the credit of the industry, right now, fee schedules are helping contain costs. I read an article recently that the CMS is predicting medical inflation to be somewhere between 2.5% and 3.5%, going to 2024 in the years to come.
If the industry can hold on to that, that would be fantastic, but there's going to be pressure, no question, on medical inflation. So I feel really good about our margins going forward because I know we're maintaining that discipline.
Matt Carletti (Managing Director)
Great. And then one last quick one, if I could. ELCM for the quarter?
Janelle Frost (President and CEO)
1.46.
Matt Carletti (Managing Director)
1.46. Awesome. Thanks so much. Appreciate it.
Janelle Frost (President and CEO)
Thank you, Matt.
Operator (participant)
We'll now take our next question from Mark Hughes with Truist.
Mark Hughes (Managing Director and Senior Equity Research Analyst)
Yeah, thanks. Good morning, Janelle. Good morning, Andy.
Janelle Frost (President and CEO)
Good morning, Mark.
Andy Omiridis (EVP and CFO)
Good morning, Mark.
Mark Hughes (Managing Director and Senior Equity Research Analyst)
So Janelle, frequency down 6%, and then I think, did you say severity was within your expectations? Did you give a number for that?
Janelle Frost (President and CEO)
Yes.
Mark Hughes (Managing Director and Senior Equity Research Analyst)
I missed the first couple.
Janelle Frost (President and CEO)
I did not. I did not.
Mark Hughes (Managing Director and Senior Equity Research Analyst)
Okay.
Janelle Frost (President and CEO)
But within our expectations, built into the 71% that we've been carrying for Accident Year 2023.
Mark Hughes (Managing Director and Senior Equity Research Analyst)
Yeah. And have you ever historically outlined your expectations on severity, low single digits?
Janelle Frost (President and CEO)
That's a great que.
Mark Hughes (Managing Director and Senior Equity Research Analyst)
Or something like that.
Janelle Frost (President and CEO)
Yeah, that's a great question, Mark. I mean, if you think about it in terms, again, I was just talking to Matt about, if you think about in terms of medical inflation, you know, we've always took a long-term approach to that, and it's always been mid-single digit range in terms of medical inflation. The other side of that is just how many, you know, given the types of injuries that we deal with, you know, I don't know in any given year, how many of those are gonna be the horrific, catastrophic claims. You know, I mentioned in my prepared remarks, we had nine claims with million dollar, in excess of million dollar case incurred this year, which is a little bit lower than prior years.
So, you know, I hate to go back to my favorite term when I'm talking about severe claims, but we're just in a lumpy business. I don't know when the accident is gonna happen or the severity of those accidents.
Mark Hughes (Managing Director and Senior Equity Research Analyst)
Yeah. Did you have any movement in the reserves on the large accident that came at the end of, was it 2022?
Janelle Frost (President and CEO)
No. No, we have not. No, we have not. We feel very.
Mark Hughes (Managing Director and Senior Equity Research Analyst)
Okay.
Janelle Frost (President and CEO)
Comfortable with the reserves that we initially recorded for that claim.
Mark Hughes (Managing Director and Senior Equity Research Analyst)
Yeah. The audit premium is holding in there pretty well. One might have thought, you know, with the economy slowing, that would be tapering a bit. Is there any particular area you're seeing a better audit premium?
Janelle Frost (President and CEO)
You know, Mark, across our book, we're seeing strong audit premium. You know, we, across our book, I can tell you, we had, about 7.4% of what I would call payroll growth. 5.6 of that was wage growth. And if you look at BLS data, I think the wage growth number projected, at least for construction or maybe the countrywide, was, is 4.1 as of the last quarter. So we're, we're running slightly higher than that. That doesn't really surprise me, given the skilled labor jobs that we insure. And we're still not seeing a large influx of new employees. Now, what the labor market will do in 2024, you know, that I don't know.
But, construction jobs are up, so we feel pretty confident, that being a large part of our book of business, that, that should be pretty resilient in 2024.
Mark Hughes (Managing Director and Senior Equity Research Analyst)
Yeah. I was gonna ask you that question. You used the formulation of, you know, kind of the next job, but sounds like you see construction holding in there pretty well.
Janelle Frost (President and CEO)
We do. We do.
Mark Hughes (Managing Director and Senior Equity Research Analyst)
Okay. And with the, 7.4 and 5.6, was that the fourth quarter, or was that full year?
Janelle Frost (President and CEO)
That was fourth quarter, and it was right in line with third quarter. If you recall, third quarter was 7.5%, so in line, no real deterioration between the two quarters.
Mark Hughes (Managing Director and Senior Equity Research Analyst)
Yeah. And you think the still projected loss cost is gonna be down high single digits again?
Janelle Frost (President and CEO)
I do. And again, that's Janelle, Janelle's opinion, but I do. I mean, based on the things that we've seen come in, the approved loss costs that have already come in the door this year, I do think that.
Mark Hughes (Managing Director and Senior Equity Research Analyst)
Mm-hmm.
Janelle Frost (President and CEO)
I just don't see anything on a macro basis that's gonna change that. I mean, we'll get industry-wide results in May, and we'll see what that looks like. But just based on, you know, following other companies and their reporting, I don't think anyone's had any large surprises in terms of losses. Concerns, you know, I think we can all list the things we worry about but haven't really seen it in the results, so I don't know that that will change the perspective on loss costs.
Mark Hughes (Managing Director and Senior Equity Research Analyst)
Yeah. You mentioned the growth being helped by your ease of doing business. Anything on the competitive front or your change in your own appetite in terms of end markets, class codes, anything like that?
Janelle Frost (President and CEO)
No, I appreciate the clarity on that. No, we really have not changed our underwriting approach. We have not changed our mix of business. We haven't changed our risk tolerance. This is really just about trying to further our relationships with our agents.
Mark Hughes (Managing Director and Senior Equity Research Analyst)
Yeah. Yeah. Okay. Yeah, I think that was it for me. Appreciate it.
Janelle Frost (President and CEO)
Thank you, Mark.
Operator (participant)
Once again, that is star one, if you would like to ask a question. We'll take our next question from Bob Farnam with Janney.
Bob Farnam (Managing Director)
Hey there. Good morning.
Janelle Frost (President and CEO)
Good morning, Bob.
Bob Farnam (Managing Director)
I have additional questions on the approved loss cost. So, this year you got Florida down 15%. You have a change coming up in Louisiana, down 9% or so. I'm curious, do the classes of business that you write are they comparable to the overall, the statewide averages, or are they better or worse in terms of kind of loss costs?
Janelle Frost (President and CEO)
That's a really good point, Bob. They are. Our book of business sometimes varies a little higher, sometimes a little lower, but on average, I think using the industry-wide, if you're trying to model out, I think using the industry-wide approved loss cost does track with our own experience.
Bob Farnam (Managing Director)
Okay. And this is probably more of a kind of a philosophical question, but as the approved loss costs continue to go down, at some point, they're going to go beyond where they should go down. So you're going to kind of.
Janelle Frost (President and CEO)
Mm-hmm
Bob Farnam (Managing Director)
Reach an inflection point, I believe. So.
Janelle Frost (President and CEO)
Yes, yes.
Bob Farnam (Managing Director)
How do you ensure that your strong profitability remains if kind of the underlying loss costs have gone too far?
Janelle Frost (President and CEO)
You know, it goes back to what I was just saying earlier. The fact that we are individually underwriting our accounts, and we, you know, and we have, we've had a very consistent book of business for a long period of time. So I think my underwriters have a true expertise in understanding how much rate or how much, how many dollars of payroll we need to cover our loss and to cover the margin that we want in that individual book of business. Hence why, you know, we always try to report the. We have been reporting the ELCM. It was just trying to give you a measure.
It's not absolute cost, but the fact that, you know, we're not chasing that 10%, 20%, you know, or 10%, 15% down in terms of the rate that the approved rate. We have, I think we have the expertise to understand that rate per $100 of payroll and what it takes for an individual risk. But we're highly relying on our expertise versus the industry-wide averages.
Bob Farnam (Managing Director)
Right. Just refresh my memory. Does the ELCM include or not include kind of scheduled credits and debits?
Janelle Frost (President and CEO)
The ELCM would include that, so it's sort of the aggregate. You know, if I took all my states.
Bob Farnam (Managing Director)
Okay.
Janelle Frost (President and CEO)
And aggregated them together, it would be inclusive of that.
Bob Farnam (Managing Director)
Yep, that's what I thought. Okay. Thank you.
Janelle Frost (President and CEO)
Thank you, Bob.
Operator (participant)
If there are no further telephone questions, I'd like to turn the conference back over to Ms. Frost for any additional or closing comments.
Janelle Frost (President and CEO)
Thank you for joining us today. We are pleased with both the quarter and full year results reported. These results are reflected of the dedication of AMERISAFE employees to fulfilling commitments to our policyholders, agents, and shareholders. Our belief, I believe our consistent returns year in and year out clearly reflect our unwavering focus on turning risk into opportunity.
Operator (participant)
Once again, that does conclude today's conference. We thank you all for your participation. You may now disconnect.